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Long-term work contracts versus sequential spot markets: Experimental evidence on firm-specific investment

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  • Anderhub, Vital
  • Königstein, Manfred
  • Kübler, Dorothea

Abstract

Dismissal rules, i.e. legally enforced long term contracts, have beem defended against criticism for, among other things, providing efficient incentives to invest in relationship specific skills. However, in many situations efficient investment can also be attained by spot contracts. We replicate such a situation with our experimental design based on a simple two period game, involving the choke of the contract; length by the principal and an investment choke by the agent. In contrast to the game theoretic predictions, we find that investment of the worker and length of contract; are strictly positively correlated. We interpret our finding as an indication for a perceived market risk due to other players' actions although the model is fully deterministic. This could imply a behaviorally relevant difference between contract and market administered incentives. --

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Bibliographic Info

Paper provided by Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes in its series SFB 373 Discussion Papers with number 1999,43.

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Date of creation: 1999
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Handle: RePEc:zbw:sfb373:199943

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Keywords: principal agent; experiment; specific human capital;

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  1. Jacob K. Goeree & Charles A. Holt, 2000. "A Model of Noisy Introspection," Virginia Economics Online Papers 343, University of Virginia, Department of Economics.
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  7. Schmidt, Stefanie R, 1999. "Long-Run Trends in Workers' Beliefs about Their Own Job Security: Evidence from the General Social Survey," Journal of Labor Economics, University of Chicago Press, vol. 17(4), pages S127-41, October.
  8. Broseta, Bruno & Costa-Gomes, Miguel & Crawford, Vincent P., 2000. "Cognition and Behavior in Normal-Form Games: An Experimental Study," University of California at San Diego, Economics Working Paper Series qt0fp8278k, Department of Economics, UC San Diego.
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  10. Boeri, Tito, 1998. "Enforcement of Employment Security Regulations, On-The-Job Search and Unemployment Duration," CEPR Discussion Papers 1850, C.E.P.R. Discussion Papers.
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  13. MacLeod, W Bentley & Malcomson, James M, 1989. "Implicit Contracts, Incentive Compatibility, and Involuntary Unemployment," Econometrica, Econometric Society, vol. 57(2), pages 447-80, March.
  14. Prendergast, Canice, 1993. "The Role of Promotion in Inducing Specific Human Capital Acquisition," The Quarterly Journal of Economics, MIT Press, vol. 108(2), pages 523-34, May.
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Cited by:
  1. Charness, Gary & Kuhn, Peter, 2011. "Lab Labor: What Can Labor Economists Learn from the Lab?," Handbook of Labor Economics, Elsevier.
  2. Werner Güth & Martin G. Kocher & Vera Popova, 2010. "Co-employment of permanently and temporarily employed agents," Jena Economic Research Papers 2010-016, Friedrich-Schiller-University Jena, Max-Planck-Institute of Economics.
  3. Bernhard Ganglmair, 2008. "Breakup of Repeat Transaction Contracts, Specific Investment, and Efficient Rent-Seeking," JEPS Working Papers 08-001, JEPS.

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